An oil well is seen near Denver, Colorado. Picture: Reuters
An oil well is seen near Denver, Colorado. Picture: Reuters

Singapore — Oil dipped on Friday but stayed near three-year highs reached earlier this week, with the Opec-led supply cuts and strong demand gradually drawing down excess supply

Brent crude oil futures were at $73.62 a barrel at 5.47am GMT, down 16c, or 0.2%, from their last close.

US West Texas Intermediate (WTI) crude futures were down 20c, or 0.3%, at $68.09 a barrel.

Both Brent and WTI hit their highest levels since November 2014 on Thursday, at $74.75 and $69.56 a barrel respectively. WTI is set for its second weekly gain, climbing more than 1% this week, while Brent is also poised to rise for a second week, adding around 1.5%.

Traders said Friday’s dips were the result of profit-taking following Thursday’s multi-year highs.

Oil prices have been buoyed by a gradually tightening market.

Led by top exporter Saudi Arabia, oil cartel Opec, has been withholding production since 2017 to draw down a global supply overhang that had depressed crude prices between 2014 and 2016.

"Commercial inventories in the OECD are now essentially at their five-year average, and drawdowns likely accelerate as refineries emerge from maintenance ahead of peak seasonal demand," US investment bank Jefferies said on Friday.

"OECD commercial inventories could fall back to … a level not seen since the oil price collapse that began in [the third quarter of 2014]. On a day of forward demand basis, we believe cover could drop below 57 days later this year, a level last seen in 2011," it added.

The tighter oil market is feeding into refined products.

"Signs of tightness are emerging in product markets as stocks saw the largest week-on-week draw since October, 2016.… The US led the draws but was also aided by draws in Singapore," said US bank Morgan Stanley.

This tightness is also a result of healthy oil demand.

"Global oil demand data so far in 2018 has come in line with our optimistic expectations, with [the first quarter of 2018] likely to post the strongest year-on-year growth since [the fourth quarter of 2010] at 2.55-million barrels per day," US bank Goldman Sachs said in a note published late on Thursday.

Beyond Opec’s supply management, crude prices have also been supported by an expectation that the US will re-introduce sanctions on Opec-member Iran.

"The first key geopolitical issue is the expiration of the current US waiver of key sanctions against Iran," said Standard Chartered Bank in a note this week, referring to a deadline on May 12 when US President Donald Trump will decide whether or not to re-impose sanctions.

One factor that could start weighing on prices is rising US production, which has jumped by a quarter since the middle of 2016 to 10.54-million barrels a day, making the US the world’s second-biggest producer of crude oil behind only Russia, which pumps almost 11 million barrels a day.